MANAGEMENT BOARD S REPORT ON THE ACIVITIES OF THE CAPITAL GROUP OF BANK GOSPODARKI ŻYWNOŚCIOWEJ S.A. FOR 2011

Transcription

1 MANAGEMENT BOARD S REPORT ON THE ACIVITIES OF THE CAPITAL GROUP OF BANK GOSPODARKI ŻYWNOŚCIOWEJ S.A. FOR 2011 Warsaw, 5 March 2012

2 CONTENT CONTENT 2 1. EXTERNAL CONDITIONS FOR THE FUNCTIONING OF THE BGŻ S.A. GROUP MACROECONOMIC SITUATION Results of THE BANKING SECTOR STOCK EXCHANGE AND INVESTMENT CONDITIONS 6 2. COMPOSITION OF THE CAPITAL GROUP AND METHODS USED FOR CONSOLIDATION OF THE FINANCIAL STATEMENTS 8 3. IMPORTANT EVENTS IN BGŻ S.A. IN AUTHORITIES OF THE PARENT COMPANY 9 5. EXTERNAL RATING OF THE PARENT RATINGs SHAREHOLDING STRUCTURE OF THE BANK Initial public offering FREE OF CHARGE DISPOSAL OF SHARES BELONGING TO THE STATE TREASURY IN FAVOUR OF EMPLOYEES FINANCIAL POSITION OF THE BGŻ S.A. CAPITAL GROUP FINANCIAL POSITION IN 2011 COMPARED WITH ACTIVITIES OF THE BANK IN DISTRIBUTION CHANNELS RETAIL BANKING BROKERAGE SERVICES AND DISTRIBUTION OF PARTICIPATION UNITS IN investment fund managing companies (TFI) INSTITUTIONAL BANKING ACTIVITIES ON MONEY AND FOREIGN EXCHANGE MARKETS COLLABORATION WITH BANKS AND OTHER FINANCIAL INSTITUTIONS Average basic interest rates used in the financial year 33 Table 30. Average basic interest rates BGŻ S.A. in BANK ORGANIZATION AND PERSONNEL DEPARTMENT It department ACTIVITIES OF SUBSIDIARIES AND ASSCOCIATED COMPANIES OF THE CAPITAL GROUP OF BGŻ S.A Bankowy Fundusz Nieruchomościowy Actus Sp. z o.o BGŻ Leasing Sp. z o.o RISK MANAGEMENT CREDIT RISK FINANCIAL RISK OPERATING RISK LEGAL RISK INFORMATION ABOUT THE AUDITOR REPORT ON APPLICATION OF CORPORATE GOVERNANCE RULES IN THE YEAR 2011 BY BANK GOSPODARKI ŻYWNOŚCIOWEJ S.A CORPORATE SOCIAL RESPONSIBILITY DEVELOPMENT PROSPECTS OF THE CAPITAL GROUP BGŻ S.A STRATEGY FOR THE YEARS IMPORTANT EVENTS AFTER BALANCE SHEET EVENTS 51 Strona 2 z 51

3 1. EXTERNAL CONDITIONS FOR THE FUNCTIONING OF THE BGŻ S.A. GROUP 1.1. MACROECONOMIC SITUATION In the year 2011 Poland maintained high, compared to other EU countries, dynamics of economic growth (4.3% y/y according to preliminary data compared to 3.9% y/y in the year 2010). The main driver behind growth in the GDP was increasing expenditure for tangible fixed assets (growth of 8.7% y/y compared to 0.2% y/y in the year 2010). The main role in the growth played public infrastructural investments, although private investments consecutively improved. However, a significant increase in uncertainty relating to growing fiscal problems in the Euro zone, had adverse effect on the economic conditions in the second half of year. The growth of individual consumption visibly deteriorated (change in this segment decreased from 3.7% y/y in the Q1 to 2.2% y/y in Q4). On the other hand, due to depreciation of Polish currency, a significant increase was recorded in the contribution of foreign trade to the GDP. This was related to reduced demand for imported goods and due to maintained relatively high exports (the result of deteriorating economic condition of main business partners of Poland was neutralized by depreciation of Polish zloty). Chart 1. Increase in GDP (y/y) 5,0% 4,4% 4,7% 4,5% 4,3% 4,2% 4,2% 4,0% 3,5% 3,0% 3,0% 2,0% 1,0% 0,0% I kw. II kw. III kw. IV kw. I kw. II kw. III kw. IV kw Source: GUS, own estimates Chart 2. Registered unemployment rate 14,0 13,5 13,0 12,4 12,5 12,5 12,0 11,5 11,0 10,5 10, The relatively high pace of economic growth did not prevent weakening of Polish labour market. Throughout the entire year 2011 the unemployment rate was on average 12.4% (compared to 12.1% in the prior year). At the same time, the dynamics of average wage in real terms in the sector of enterprises decreased (to 0.7% y/y in 2011 from 1.0% y/y in 2010). The improvement in the profitability of exports did not manage to uphold the growth rate of the production at the 2010 levels (yearly average dynamics decreased from 9.0% y/y in 2010 to 6.8% y/y in 2011). Weakening of Polish zloty and strong increase in fuel prices, as well as fluctuation in regulated prices juxtaposed with the relatively strong internal demand had impact on the material increase in the rate of inflation. The highest increase in prices of goods and consumer services, on a year-to-year basis, was recorded in May and was 5% (i.e. twice the amount of the inflation target of the Monetary Policy Council). On a yearly average basis, the inflation rate was 4.3% compared to 2.6% in the year Strong increase in consumer prices combined with higher base inflation rate made the Monetary Policy Council to increase interest rate four times in the year 2011, each time by 25 base points (in January, April, May and June). The reference rate increased from 3.50% to 4.50%, whilst the bills of exchange rediscounting rate which is the reference basis for interest rate of preference loans for agriculture increased to 4.75%. Growing problems with excessive debt of some countries of the Euro zone and the resultant threats to the European banking sector led to material outflow of capital from European markets, including in particular from the Eastern Europe countries. This resulted in a rapid depreciation of Polish zloty against currencies of the main economies. At the same time, a strong appreciation was observed of the American currency against euro, which in turn caused weakening of Polish zloty against USD. On the other hand, depreciation of Polish zloty against Swiss franc was limited by implementation of the minimum acceptable level of the EUR/CHF exchange rate by the National Bank of Switzerland. Strona 3 z 51

4 3,5% 2,9% 2,6% 2,4% 2,2% 2,3% 2,0% 2,0% 2,5% 2,8% 2,7% 3,1% 3,6% 3,6% 4,3% 4,5% 5,0% 4,2% 4,1% 4,3% 3,9% 4,3% 4,8% 4,6% Bank Gospodarki Żywnościowej Spółka Akcyjna 6,00% 5,00% 4,00% 3,00% 2,00% 1,00% 0,00% Chart 3. Inflation and interest rates 6,00% 5,00% 4,75% 3,75% 4,50% 3,50% Stopa Inflation inflacji rate Stopa Rediscount redyskontowa rate NBP Stopa Lombard lombardowa rate NBP Stopa Reference referencyjna rate NBP Chart 4. PLN exchange rates 4,70 4,50 4,30 4,10 3,90 3,70 3,50 3,30 3,10 2,90 2,70 2,50 3,96 3,16 2,96 4,42 3,63 3, EUR/PLN USD/PLN CHF/PLN Source: GUS and NBP 1.2. RESULTS OF THE BANKING SECTOR According to the data published by Polish Financial Supervision Authority (KNF) in the year 2011, the result of the Polish banking sector increased by 37.5% y/y and reached the highest ever level of PLN 15.7 billion (compared to PLN 11.4 billion in the year 2010). The main growth factors of the banking sector net profit was increase in the interest income (by 13.1% y/y), as well as decrease in the negative balance of write-downs against tangible fixed assets (by 29.5% y/y). The decrease in the balance of write-downs was mainly the result of halting the process of deterioration of consumer loan quality. On the other hand, the increase in the balance of interest result should be associated with, among others, development of lending campaigns (in particular in the segment of housing loans and loans to enterprises) as well as improvement of deposit margins. The own funds of domestic banking sector (included in calculation of the solvency ratio) increased in 2011 by 10.2% y/y to PLN billion. Whereas general capital requirement due to the development of credit action and depreciation of PLN increased by 16.2% y/y up to PLN 67.6 billion. As a result, the solvency ratio of this sector decreased by 0.7 pp to 13.1% on an annual basis. Table 1. Selected data of income statement for banking sector billion PLN Change y/y Net interest income % Net fee and commission income % Dividend income % Other elements of the net income from banking activity (0.4) (5.5%) Net income on banking activity (general) % Net income from other operating activities (0.1) (25.7%) Operating expenses of banks (26.8) (25.5) (1.3) 5.0% Amortization/Depreciation (2.6) (2.5) (0.1) 2.2% Balance of provisions and allowances (8.7) (11.2) 2.6 (22.9%) including: balance of impairment allowance on financial assets (7.4) (10.5) 3.1 (29.5%) Gross profit % Income tax (3.9) (2.8) (1.1) 38.5% Net profit % Source: KNF. In the year 2011, the activity of the banking sector measured by the pace of growth of loans and deposits volumes increased slightly compared to that of the year Loans to non-banking clients increased by 14.8% y/y (whilst in the year by 9.8% y/y), whilst deposits of this group of clients - Strona 4 z 51

5 by 11.0% y/y (in the year by 9.0% y/y). The ratio of loans to deposits at the end of 2011 was 113.2%, i.e. was 3.8 bps. higher than at the end of The growth in loans to private individuals slowed down from 14.8% in 2010 to 11.8% in 2011 mainly as a result of growing statistical base of Polish zloty housing loans. In nominal terms, the increase in those loans amounted in 2011 to PLN 22.9 billion and was almost identical with that recorded in The reasons behind this situation were particularly due to: continuation of the government-subsidized program Rodzina na Swoim on customer favourable terms and conditions, fear for its liquidation (encouraging clients to take loan-taking decisions in a shorter period of time), as well as liberalization of price-related lending regulations. Positive impact of above factors on the development of housing loans was clearly seen until the end of Q After that, changes were introduced to the Rodzina na Swoim program, resulting in a decrease of its availability (decrease in the price limit for a flat, where the subsidy is applicable and introduction of age restrictions for people applying for a donation, and the trend of declining credit margins was put to an end. One should note, however, that in 2011 the predominant credit product sold were Polish zloty housing loans. Increase in the balance of outstanding housing loans in foreign currencies (by 16.9% y/y) resulted mainly from depreciation of Polish zloty against Swiss franc (by 14.8% y/y) and against Euro (by 11.5% y/y). Year 2011 marked the period of stagnation in the segment of consumer loans the balance of outstanding consumer loans decreased in this period by 2.4% y/y. Such situation was due to the continued trend of low demand for this type of loans and due to coming into effect of the second part of the Recommendation T, which caused that the banks continued to apply tighter lending policy. In addition, disposal of part of the bad loans portfolio by banks had also effect on the decrease in the volume of consumer loans. Higher than in 2010 pace of the overall growth in the lending market was due to the dynamic increase in loans to enterprises, especially to the SMEs. On one hand, the increase reflected business activity of the SMEs and the drive of some of them to invest, and on the other was caused by the banks making their lending policies in this segment less strict (in Q1 and Q2 of 2011), which was due, among others, to stabilization of the portfolio of receivables from this group of clients. In the year 2011, the lending campaign in the segment of individual entrepreneurs and in the segment of individual farmers, who modernized their business, developed more quickly. Table 2. The value of loans of the banking sector billion PLN, balance at the end of the year Change Loans to private individuals 453,2 405,4 353,2 11,8% 14,8% - Real estate loans 317,2 266,1 216,4 19,2% 23,0% - PLN 122,3 99,4 76,3 23,1% 30,2% - foreign currency 194,9 166,8 140,1 16,9% 19,0% - consumer loans 135,9 139,3 136,8 (2,4%) 1,8% Loans to institutional clients 432,1 365,7 349,1 18,2% 4,7% - non banking financial institutions 24,9 24,9 26,6 0,1% (6,2%) - non financial entities 330,4 282,4 278,7 17,0% 1,3% corporate customers 253,3 214,5 216,6 18,1% (0,9%) individual customers 50,7 44,4 40,0 14,2% 11,0% individual farmers 22,2 20,1 19,4 10,4% 3,5% non for profit organizations 4,2 3,4 2,7 22,4% 25,5% - loans to public sector 76,8 58,3 43,9 31,7% 32,9% Loans to non - banking customers 885,3 771,1 702,4 14,8% 9,8% Source: NBP,data for monetary financial institutions, excluding Central Bank and SKOK, only residents. The main source of increase in the sector of banking deposits in 2011 were still savings of private individuals, which grew faster than in The increase in the volume of private deposits resulted mainly from the increase in the volume of term deposits, which took place mostly in the second half of Higher deposit activities of private individuals were affected primarily by relatively low business trading on the Warsaw Stock Exchange lasting since June, which was accompanied by more attractive pricing offered for term deposits. This was partly the result of the increase in NBP interest rates by the Monetary Policy Council which took place in the first half of To a larger degree, this was caused Strona 5 z 51

6 by certain deterioration of banks overall liquidity condition, which was the result of strong depreciation of Polish zloty and deteriorated effectiveness of the inter-bank market functioning. Worsening of the situation on the inter-bank market occurred in the second half of 2011 and was related to escalation of debt crisis of the Euro-zone countries. Despite growing trend to invest showed by enterprises, year 2011 also saw a strong, faster than in 2010, trend of growth in deposits volume. The said growth was caused, among others, by dynamic increase in exports revenues in the circumstances of weak Polish zloty, and by the lasting relatively high internal demand. A significant impact on the recorded high dynamics of enterprise deposits in Q had nevertheless the transaction of sale by Polish owners of Polkomtel shares. The high increase in enterprise deposits in 2011 was to some extent compensated by considerable decrease in public sector deposits. As a result, deposits of institutional clients in 2011 grew only at a pace approximating that recorded in Table 3. The value of deposits in the banking sector (billion PLN, balance at the end of the year) Change Deposits of private individuals 435,0 381,8 346,6 13,9% 10,2% - current 204,4 197,2 157,7 3,6% 25,0% - term 230,7 184,6 188,9 24,9% (2,2%) Deposits of institutional clients 347,2 323,1 300,1 7,5% 7,6% - non banking financial institutions 43,3 39,2 35,6 10,5% 10,1% - non financial entities 252,9 229,1 211,0 10,4% 8,6% Corporate customers 205,0 182,8 166,4 12,2% 9,8% Individual entreprenours 24,8 23,9 23,4 4,0% 2,1% Individual farmers 7,9 7,4 6,9 7,5% 6,5% Non for profit institutions 15,1 15,0 14,3 0,5% 5,4% - public sector deposits 51,0 54,9 53,6 (7,0%) 2,4% Deposits of non banking clients 782,2 704,9 646,7 11,0% 9,0% Source: NBP, NBP,data for monetary financial institutions, excluding Central Bank and SKOK, only residents STOCK EXCHANGE AND INVESTMENT CONDITIONS In Q1 2011, the Warsaw Stock Exchange (WSE) continued to show growing trend that commenced in The very peak of the boom took place in the first half of April, whilst over the following four months Polish market saw mild declining trend. In the first half of August 2011, a rapid slump was recorded, yet after two weeks of significant decreases, indexes stabilized and since then until year end, the horizontal trend prevailed. At the end of 2011, the values of individual exchange indexes approximated those prevailing at the end of 2009 and thus one may say that the prior year levelled out the 2010 profits. Indexes of large and medium-sized enterprises (WIG20 and mwig40) fell in the prior year by more or less the same (-21.9% and -22.5%, respectively). The index of smaller enterprises, swig80, which decreased by 30.5% was rather weak. Table 4. Value of main Stock Exchange indices Index 31/12/ /12/ /12/2009 Change WIG (20.8%) 18.8% WIG (21.9%) 14.9% mwig (22.5%) 19.6% swig (30.5%) 10.2% Source: WSE The decrease in all WSE indexes caused a 17.78% decrease in capitalization despite 6.5% increase in the number of listed companies. Strona 6 z 51

7 The WSE share trading result in 2011 was PLN billion. Compared to the prior year, turnover in this segment was 14.4% higher and although the increase was lower than in the prior year (33.2%), the trading turnover marked the highest ever annual trading result in the history of Warsaw Stock Exchange. In 2011, the result from trading in derivatives also increased. In the case of options, a 39.5% increase was recorded in terms of value and a 33.0% increase in terms of volume. As regards trading in forward contracts, the trading result increased by 6.2%, whilst the volume - by 4.3%. A very clear decrease (of 41.5%) was recorded on the market of bonds trading. Table 5. Number of companies, capitalization and turnover on the WSE Change Number of companies % 5.5% Capitalization of domestic companies (million PLN) (17.8%) 28.8% Shares turnover volume (million PLN) % 33.2% Bonds turnover volume (million PLN) (41.5%) (3.3%) Futures turnover volume (million PLN) % 31.7% Futures turnover volume (number) % 4.4% Options turnover volume (million PLN) % 101.3% Options turnover volume (number) % 60.1% Source: WSE Year 2011 was the fifth year of operations of NewConnect (NC) the alternative market for trading in shares, conducted by the WSE (it commenced its operations in 2007). For the purpose of the assessment of boom in the NC market, the most significant seems to be the dynamic increase (by almost 90%) in the number of listed companies. Owing to this increase, the capitalisation increased by 68.6% despite a 34.4% decrease in the NCIndex. However, the value of trading result decreased by as much as 47.0%. Table 6. Basic NewConnect ratios Change Specification Value of NCIndex (In points) (34.4%) 27.6% The turnover value of trading in shares (thousand PLN) (47.0%) 224.9% Number of transactions % 171.2% Capitalization (million PLN) % 102.3% Number of listed companies (number) % 72.9% Source: WSE The Catalyst bonds market has continued its operations commenced in The operations have been conducted on the WSE and BondSpot (formerly: MTS CeTO) trading platforms. Catalyst is composed of four trading platforms. Two of them are run by the WSE regulated market and Alternative Market and are dedicated to retail clients, and two analogical markets BondSpot dedicated to wholesale clients. All platforms are dedicated to non-treasury debt securities municipal bonds, corporate bonds, and covered bonds. The value and volume of trading on the Catalyst in the year 2011 showed high levels of dynamics on a y/y basis. The value of new issues in the year 2011 amounted to PLN million compared to PLN million in In the year 2011, 38 new companies had their public offers on the WSE (six of them were transferred from the NewConnect). For comparison purposes, in the year 2010 the number of new companies was 34 and in the record high year 2007, 81 new entities joined the list of listed companies. The number of entities listed on the WSE increased from 400 at the end of 2010 to 428 at the end of The value of shares sold (subscribed) during IPOs in 2011 was PLN 8.53 billion, of which new issues accounted for PLN 1.65 billion. For comparison purposes, in the year 2010, the value of IPOs was PLN billion. Strona 7 z 51

8 The prior year was another year which showed a record number of entities entering the NewConnect as 172 issuers entered this market (in the year new issuers). At the end of 2011, on the Catalyst market a total of 268 bonds issues was traded, and the value of issue exceeded PLN 530 million. At the end of 2011, the net assets of companies managing the Polish investment funds amounted to PLN billion compared to PLN billion at the end of COMPOSITION OF THE CAPITAL GROUP AND METHODS USED FOR CONSOLIDATION OF THE FINANCIAL STATEMENTS As of 31 December 2011, the Bank Gospodarki Żywnościowej S.A. Capital Group consisted of Bank Gospodarki Żywnościowej S.A. as the parent company and: Bankowy Fundusz Nieruchomościowy Actus Sp. z o.o. subsidiary, BGŻ Leasing Sp. z o.o. associated company. Table 7. Consolidation scope Entity name Type of business activities Share of BGŻ S.A. in the share capital Consolidation/val uation method Bankowy Fundusz Nieruchomościowy ACTUS Sp. z o.o. BGŻ Leasing Sp. z o.o. Acquisition and disposal of properties 100,0% Full consolidation Leasing activities 49,0% Equity method 3. IMPORTANT EVENTS IN BGŻ S.A. IN The Bank and Rabobank Nederland concluded an agreement under which Rabobank Nederland provided the Bank with the funds amounting to CHF million for the period of 12 years to finance the existing housing loans portfolio denominated in CHF - the credit facility was made available in 18 tranches starting from 29 April 2011 to 30 September The Polish Financial Supervision Authority (KNF) approved the prospectus prepared by the BGŻ S.A. in connection with the public offering of shares series A and D and with the intention to apply for admission to trading with shares series A, B, C, D, E and F on the regulated market. On 29 April 2011, KNF approved Annex No.1 to the prospectus, which included information about fixing the Maximum Share Price for the purpose of Individual Investors subscription. The price was set at the level of PLN per 1 share. The Prospectus was published on 4 May The State Treasury, in agreement with the Global Coordinators and PKO BM Brokerage House (the Co-Offering Agent) set the Sale Shares selling price at PLN 60 per share and the final number of Sale Shares under the offering amounted to Sale Shares constituting 12.05% of the Bank s share capital The first listing of the Bank s shares on the Warsaw Stock Exchange occurred on 27 May The shares were initially traded at PLN per 1 share. The Bank s shares are traded in continuous trading system under abbreviated name BGZ and marked BGZ The Moody s Investors Service rating agency decreased the rating for the Bank s longterm deposits from A3 to Baa1. Strona 8 z 51

9 A comprehensive inspection was carried out in the Bank by the Polish Financial Supervision Authority. Based on the results of the inspection, the Polish Financial Supervision Authority concluded, that as at the date of the control, the economic and financial situation of the Bank was not threatening to the security of funds placed in the Bank s accounts. In the Bank s opinion, the results of the inspection do not have immaterial influence on the financial statements Bank BGŻ started to operate direct internet banking, BGŻOptima, with its product offer available only through internet. Included in the BGŻOptima product offer are deposits, savings accounts and investment funds. The process of opening bank accounts and deposits is only remote and there is no need for the client to vist the Bank s outlet. The BGŻ Optima product offer is complementary to the Bank s main product offer as regards savings and investment products and is dedicated to clients who wish to benefit from Bank s services using the Internet. 4. AUTHORITIES OF THE PARENT COMPANY CHANGES IN THE COMPOSITION OF THE SUPERVISORY BOARD The composition of the Bank s Supervisory Board in the period between 1 January and 31 December 2011 as follows: Jan Alexander Pruijs President of the Supervisory Board Agata Rowińska Vice-President of the Supervisory Board (resignation as of ) Dariusz Filar Member of the Supervisory Board (appointed on ), Vice-President of the Supervisory Board (elected on ) Roelof Dekker Member of the Supervisory Board, Jarosław Iwanicki - Member of the Supervisory Board, Harry de Roo - Member of the Supervisory Board, Andrzej Zdebski - Member of the Supervisory Board, Waldemar Maj - Member of the Supervisory Board, Hendrik Adams - Member of the Supervisory Board, Monika Nachyła Member of the Supervisory Board (appointed as of ) CHANGES IN THE COMPOSITION OF THE MANAGEMENT BOARD The composition of the Bank s Management Board in the period between 1 January and 31 December 2011 as follows: Jacek Bartkiewicz President of the Management Board, Hieronymus Nijsen The first Vice-President of the Management Board (resignation on ), Gerardus Cornelis Embrechts The first Vice-President of the Management Board (appointed on ), Witold Okarma Vice-President of the Management Board, Andrzej Sieradz Vice-President of the Management Board, Johannes Gerardus Beuming Vice-President of the Management Board (appointed on ), Dariusz Odzioba Vice-President of the Management Board (appointed on ), Strona 9 z 51

10 Wojciech Sass Vice-President of the Management Board (appointed on ), Magdalena Legęć Vice-President of the Management Board (appointed on ). 5. EXTERNAL RATING OF THE PARENT 5.1. RATINGS The Bank is rated by the Moody s Investors Service rating agency. On 2 June 2011, the Moody's Investors Service downgraded its long-term deposit rating of the Bank to Baa1 from A3, with negative outlook. The Bank's standalone financial strength rating ( BFSR ) of D was not affected and remained on a stable outlook. The short-term bank-deposit rating of Prime-2 remains unchanged. According to Moody s the downgrade reflects the change in ownership structure of the Bank following the IPO, and the rating agency s view that this results in greater uncertainty regarding the potential for exceptional parental or systemic support in case of need. The long-term deposit rating nonetheless continues to factor in a very high expectation of the parental support and a medium expectation of the systemic support. The negative outlook on the supported long-term deposit rating was influenced by the potential for further disposal of the government s remaining stake in the Bank as well as the negative outlook on stand-alone BFSR rating of the Bank s majority shareholder 6. SHAREHOLDING STRUCTURE OF THE BANK 6.1. INITIAL PUBLIC OFFERING On October 14, 2010, the Extraordinary General Meeting of Shareholders agreed to apply for admission of the Bank s shares for trading on a regulated market and their dematerialization. The subject of the IPO was to be 16,046,596 ordinary shares constituting 37.20% of shares held by the State Treasury. On April 28, 2011, the KNF approved the prospectus prepared by BGŻ S.A. in connection with the public offering of shares series A and D and with the intention to apply for admission to trading with shares series A, B, C, D, E and F on the regulated market. On April 29, the KNF approved Annex No.1 to the prospectus, which included information about fixing the Maximum Share Price for subscription of Individual Investors. The price was set at PLN per share. The Prospectus was published on May 4, On May 17, 2011, the State Treasury, in agreement with the Global Coordinators and DM PKO BP Brokerage House (the Co-Offering Agent) set the Sale Shares selling price at PLN 60 per share and the final number of Sale Shares under the offering to 5,200,000 Sale Shares constituting 12.05% of the Bank s share capital The first listing of the Bank s shares on the Warsaw Stock Exchange occurred on May 27, As a result, the Bank established the Investors Relations Team, acting in the area supervised by the first Vice President of the Management Board. As part of its program of stabilization, the State Treasury re-acquired shares of the Bank. As at 31 Dec 2011, the State Treasury held 25.54% shares of the Bank s issued share capital FREE OF CHARGE DISPOSAL OF SHARES BELONGING TO THE STATE TREASURY IN FAVOUR OF EMPLOYEES In the year 2011, the Bank continued the process of concluding on behalf of the State Treasury of agreements for free of charge disposal of shares of BGŻ S.A. to persons authorized based on the Strona 10 z 51

11 provisions of the act on the functioning of cooperative banks, 32 such agreements were concluded which comprised shares. Table 8. BGŻ S.A. shareholders structure Shareholder Number of shares Structure Number of (%) shares Structure (%) Rabobank International Holding B.V Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A State Treasury Other shareholders TOTAL FINANCIAL POSITION OF THE BGŻ S.A. CAPITAL GROUP 7.1. FINANCIAL POSITION IN 2011 COMPARED WITH 2010 In 2011, the Group generated a net profit of PLN thousand compared with PLN thousand in The main driver of growth in net profit was the increase in net interest income. Table 9. Consolidated income statement Change PLN thousand PLN thousand % Net interest income % Net fee and commission income (1 630) (0.6%) Dividend income % Result on trading activities (41 687) (29.0%) Result on investing activities % Other operating income % Net impairment losses on loans and advances ( ) ( ) (28 980) 21.6% Administrative expenses ( ) ( ) ( ) 19.8% Other operating expenses ( ) ( ) (8 081) 7.9% Operating Result % Share in profit (loss) of associates % Gross profit % Corporate income tax (21 469) (14 524) (6 945) 47.8% Net profit % Net interest income In 2011 net interest income increased by PLN thousand, i.e. by 38.0% compared to 2010, which was the result of a significant increase in interest income by PLN thousand, i.e. 22.9%, exceeding the increase in interest expenses of PLN thousand, i.e. by 11.1%. The increase in interest income was primarily affected by higher interest income on loans and advances to customers by PLN thousand, i.e. 20.7% and from overdrafts by PLN thousand, i.e. 32.4%, which was achieved through the development of credit activities. In particular, it relates to the interest income on preferential loans, mortgage loans for retail clients and current overdrafts for farmers and SMEs. The important factors in the growth of interest income from preferential loans were four increases in NBP rediscount rate (in January, April, May and June 2011, each by 0.25%), which directly influenced the level of interest rates on these loans. In addition, the increase in interest income was affected by higher income from debt securities by PLN thousand, i.e. 22.4%, which was mainly resulted from changes in portfolio structure of debt securities classified as available for sale reduction Strona 11 z 51

12 of share of short term, lower interest NBP bonds to increase share of long-term, higher-interest bonds issued by central government. The main reason for slower pace of increase in interest expenses was the stabilization of interest expense in respect to amounts due to customers, which was achieved by improvement in interest margins on clients deposits, in particular including the saving accounts Eskalacja as well as term deposits. The process of launching BGŻOptima - Internet direct banking channel on 16 November 2011 did not significantly influence the interest expenses in that year. Fluctuations in interest expenses on deposits were additionally reduced due to obtaining credit facility denominated in CHF from the majority shareholder. This credit has enabled the Group to reduce funding in local currency, with high-value institutional deposits and public sector institutions. Table 10. Net interest income Change PLN thousand PLN thousand % Amounts due from banks % Amounts due from customers under overdraft facilities % Loans and advances to customers, after considering reversal of loans interests discount on impairment losses, of which % Debt securities an all portfolios % Interest income % Amounts owed to banks % Amounts owed to customers % Interest expense % Net interest income % * Source: BGŻ S.A. managerial information. Net fee and commission income Net fee and commission income in 2011 decreased by PLN thousand, i.e. 0,6%, mainly due to the decrease of fee and commission income on service of accounts by PLN thousand, i.e. 13,5% and an increase in fee and commission expenses by PLN thousand, i.e. o 19,7%. There was also an increase in fee and commission income on loans and advances by PLN thousand, i.e. 13,4% and on debit cards by PLN thousand, i.e. 16,0%. Table 11. Net fee and commission income Change PLN thousand PLN thousand % Fee and commission income from banks % Fee and commission income from customers % - on loans and advances % - on domestic settlements (290) (21.2%) - on foreign settlements % - on account service (15 786) (13.5%) - on guarantee commitments (1 192) (8.9%) - on brokerage operations (1 928) (12.7%) - on payment cards % - other % Fee and commission income % Fee and commission expense from banks (880) (19.7%) Fee and commission expense from customers % Strona 12 z 51

13 Fee and commission expense % Net fee and commission income (1 630) (0.6%) The decrease in fee and commission income on account servicing resulted mainly from the fact, that since November 2010 the Group has incurred additional costs relating to Konto z Podwyżką offer, where the clients receive a 1% premium of inflows on the account, subject to strict conditions. These premiums were accounted for as a decrease of income. In addition, in the fourth quarter of 2010 changes to the table of fees and commissions were introduced, where the level of commission depends on the amounts of funds held on the account, in order to offer more attractive terms for customers and to improve competitive position. These changes resulted in a decrease of commission income, but they were one of the conditions that stimulated the increase of fund held on current accounts. The increase in commission income was achieved mainly due to the greater activity in granting overdraft facilities, especially for corporate customers and farmers. The increase in fee and commission income on debit cards was due to good results of sales of Konto z Podwyżką. Fee and commission expenses increased mainly due to the higher settlement costs with MasterCard and Visa operators. Dividend income Dividend income in 2011 increased by PLN 407 thousand, i.e. 12.9%. The increase consisted of dividends on shares of Krajowa Izba Rozliczeniowa S.A. - the National Clearing House SA (KIR), Biuro Informacji Kredytowej - the Credit Information Bureau SA (BIK) and the Warsaw Stock Exchange (WSE), from distribution of 2010 profits of these companies, approved by their General Assemblies. The revenue growth was mainly due to higher dividends from BIK. Result on trading activities and result on investing activities Result on trading activities decreased by PLN thousand, i.e. 29.0% due to the change of external financing structure as a result of obtaining the loan in CHF. With direct funding in CHF, the Group reduced the scale of swap transactions, which hedge the currency risk and interest rate risk of the old mortgage loans portfolio for retail customers granted till April This resulted in a decrease in result on so-called swap point, recognized in result on trading activities, and enabled growth in the net interest income due to replacement of higher interest-bearing PLN funding with lower interest-bearing CHF funding. Result on investing activities in 2011 increased by PLN thousand, i.e %. The main component of the result in 2010 were the proceeds from sale of shares in VISA Inc. amounting to PLN thousand, while in 2011 it was influenced by the portfolio of securities available for sale. Other operating income Other operating income increased in 2011 by PLN thousand, i.e. 15.4%, primarily due to increase of income from recovered receivables that were previously written off, expired, canceled or determined uncollectible, as well as barred or bad debts and repayments excluded from the balance sheet in the amount of PLN thousand, i.e. 75.7%, which was achieved due to debt collection activities. The increase in other operating income by PLN thousand, i.e. 94.4%, resulted mainly from release of provision for 2010 liabilities, related to bonuses for employees and external services. The increase of PARP expenses compensation by PLN thousand, i.e % resulted mainly from conduction of Strona 13 z 51

14 a training program Rośnijmy razem, which was subsidized by the Polish Agency for Enterprise Development. Table 12. Other operating income PLN thousand Change PLN thousand From management of third-party properties (90) (5.9%) From sale or liquidation of property, plant and equipment, intangible assets and assets held-for-sale From recovered statute barred receivables, written off or bad debts, repayments of derecognized receivables (3 650) (65.1%) % Sales of goods and services % Reversal of provisions for other receivables (excluding loan receivables) % Reversal of impairment allowances for fixed assets Reversal of provisions for liabilities (756) (8.2%) From recovery of costs incurred (511) (21.2%) Valuation of investment property (700) (100.0%) Revenue from PARP expenditures compensation % Reversal of not utilized provision for non personnel costs (1 101) (15.3%) Other operating income % Total other operating income % % Net impairment losses on loans and advances Net impairment losses on loans and advances increased by PLN thousand, i.e. 21.6%. It was mainly the result of higher write offs for mortgage loans for retail customers. The net write offs for cash loans decreased. The increase of write offs in 2011 compared to 2010 resulted also from an update of parameters in the model used for calculation of impairment losses, that resulted in reversal of provisions for financial assets by PLN 77.1 million recognized in profit or loss. General administrative expenses General administrative expenses increased by PLN thousand, i.e. 19.8%, mainly due to higher staff costs, external services, other material expenses and contributions to the BFG and the KNF. Growth in each of the above-mentioned categories of expenses was partly caused by the fact, that approximately ¾ of 61 new branches opened in 2010 was launched in the second half of the year and 2011 was the first full year of their operations. The increase in staff expenses by PLN thousand, i.e. 19.5%, resulted from an increase in accruals for individual premiums and employees bonuses (in 2010 the Bank applied the restrictions on employee bonuses introduced in 2009), employment growth related with the continuing expansion of the Bank s branch network, and the adjustment of the remuneration policy (from 1 April 2011) in response to the increase in competition in the labour market in the banking sector. The increase in the external services expenses by PLN thousand, i.e. 11.7% was caused by the increase in Bank s demand on advisory services related to the preparation for IPO. The total IPO costs included in 2011 amounted to PLN thousand. Strona 14 z 51

15 The increase in other overhead expenses by PLN thousand, i.e. 28.1%, was mainly due to the expansion of the Bank s branch network, which resulted in increased costs of renting premises. The increase in contributions to the BFG and the KNF was due to more than double increase in rate of contribution to BFG effective in 2011 compared with the previous year. In 2011 the Bank has incurred costs connected with launch of direct banking BGŻOptima, which amounted to PLN thousand and relating mainly to marketing, consulting services and amortization of intangible assets licenses for systems. Table 13. General administrative expenses Change PLN thousand PLN thousand % Employee benefit costs, of which: % - Payroll % - Social security % - Other % Materials and energy % External services % Other non-personnel costs % Taxes and charges % Contributions and amounts transferred to the Bank Guarantee Fund (BFG) and PFSA % General administrative expenses, total % Amortization and depreciation(1) % Total costs (2) % (1) In the financial statements presented in other operating costs (2) Total costs used in the calculation of the Cost/Income ratio Other operating costs Other operating costs in 2011 increased by PLN thousand, i.e. 7.9%, primarily due to increase in depreciation by PLN thousand, i.e. 13.3%, which was connected with the described above expansion of Bank s branch network and continuation of investment in the IT area and the commencement of amortization of BGŻOptima license. Table 14. Other operating costs Change PLN thousand PLN % thousand Due to the management of third-party assets (223) (17,0%) Due to the sale or liquidation of property, plant and equipment, intangible assets and assets or sale Due to recognized provisions for other receivables (other than loans and advances) (1 438) (43,4%) ,1% Due to recognized provisions for liabilities ,7% Due to debt recovery ,4% Donations ,8% Amortization and depreciation ,3% Valuation of investment property Other operating costs (3 434) (63,4%) Other operating costs, total ,9% Strona 15 z 51

16 Total comprehensive income The Group s comprehensive income in 2011 increased by PLN thousand, i.e. o 31.5%, due to positive revaluation of available-for-sale financial assets included in other comprehensive income in the amount of PLN thousand, compared to negative revaluation in the amount of PLN thousand in Positive revaluation in 2011 related to the portfolio of long-term State Treasury bonds and resulted from decrease in market margins at the so-called long end of the yield curve after a series of increases of interest rates by NBP, which caused weakening of long-term inflation expectations. Assets At the end of 2011, total Group s assets amounted to PLN thousand and were by PLN thousand, i.e. 16.7% higher than in the prior year. The main growth factor were loans and advances to clients which increased by PLN thousand, i.e. 21.9%, mainly due to increase in overdraft facilities of enterprises and farmers, investment loans for enterprises and preference loans for farmers. In 2011, there were no restructuring bonds element in the Group s assets, previously reported in other debt securities line. On 24 September 2011, in accordance with timetable, the Ministry of Finance redeemed the last tranche of restructuring bonds granted to Bank in 1996 with the aim to increase own funds. The increase in intangible assets by PLN thousand, i.e. 51,3%, resulted mainly from a capitalization of a system for BGŻOptima and investment in current infrastructure development. The increase in investment in associates by PLN thousand, i.e. 46,6%, resulted mainly from succeeding recapitalization of BGŻ Leasing sp. z o.o. associate. Table 15. Assets PLN thousand Change PLN thousand Cash and balances with the Central Bank ,3% Amounts due from other banks (59 849) (21,3%) Receivables arising from reverse repo transactions ( ) (43,8%) Held-for-trading securities ( ) (10,1%) Derivative financial instruments ,6% Loans and advances to customers ,9% Securities available for sale ,2% Other debt securities ( ) (100,0%) Investment property (499) (0,8%) Investments in subsidiaries and associates ,6% Intangible assets ,3% Property, plant and equipment ,5% Deferred tax asset (24 347) (10,5%) Current tax asset (44 800) (100,0%) Other assets ,4% TOTAL ASSETS ,7% % Liabilities and equity At the end of 2011, total Group s liabilities amounted to PLN thousand and were by PLN thousand, i.e. 17.7% higher compared to the prior year. The main growth factor related to increase in liabilities to other banks by PLN thousand, i.e %, mainly due to obtaining CHF denominated loan from the majority shareholder and loan amounting to EUR 50 million from Strona 16 z 51

17 European Bank for Reconstruction and Development. Liabilities to customers increased significantly by PLN thousand, i.e. 9.0% mainly due to deposits obtained through BGŻOptima. Table 16. Liabilities and equity PLN thousand Change PLN thousand Amounts owed to other banks % Liabilities arising from repo transactions ( ) (100.0%) Derivative financial instruments and other liabilities held for trading % Amounts owed to customers % Liabilities from issued debt securities % Other liabilities % Deferred tax liability (95) (1.0%) Current tax liabilities - 3 (3) (100.0%) Provisions % Liabilities arising from employee benefits % TOTAL LIABILITIES % Issued share capital Reserve capital % Accumulated profit/ (loss) from previous years (160) (1.9%) Other reserves % Undistributed profit % EQUITY % LIABILITIES AND EQUITY % % Another important event, relating to liabilities to customers, was decrease in deposits from public sector, resulting from effective from July 1, 2011, regulations concerning consolidation of financial resources of selected state budget institutions at the state-owned bank, Bank Gospodarstwa Krajowego S.A. (BGK). The above change in regulations affected one of the most important deposit client of the Bank, i.e. government agency operating in the agricultural sector. As a result, liabilities to public sector decreased in 2011 by PLN thousand, i.e. 54.1%. At the same time, the effect of outflow of such deposits was balanced by increase in other client deposits, mainly deposits from other financial entities, and subsequently from corporate customers and BGŻOptima customers. In 2011 the Group increased the issue of certificates of deposits by PLN thousand, i.e. 16.5% which are flexible and relatively inexpensive source of financing. At the end of 2011 total Group s shareholders equity amounted to PLN thousand and was by PLN thousand, i.e. 5.7% higher than in previous year. The increase resulted from retaining of net profit for the year 2010, as well as of the increase in the revaluation reserve for available-for-sale financial assets, which is described in the section Other comprehensive income. Loan portfolio quality The ratio of impaired receivables in gross loans and borrowings to clients improved from 6.4% at the end of 2010 to 5.7% at the end of This resulted from the increase in gross loan portfolio by 22.1%, which exceeded the increase in gross receivables that were impaired, by 9.0%. The factor stabilizing portfolio quality was very good and still improving situation of the farmer loans portfolio, which at the end of 2011 accounted for 21.0% of the gross Group portfolio. Also, the quality of the portfolio of institutional loans not operating in the Agro sector improved and this was the result of collecting significant amounts from large enterprise clients. Strona 17 z 51